The Martoma Trial: Five Things We’ve Learned So Far

Watch To Catch a Trader FRONTLINE’s examination of the government’s vast investigation into insider trading in the hedge fund industry.

It’s been nearly three weeks since the insider-trading trial of Mathew Martoma, a former portfolio manager at SAC Capital Advisors, opened in New York.

Federal prosecutors say Martoma is on trial for what may be “the most lucrative inside tip of all time.” If convicted, he faces as much as 20 years in prison on each of two counts of securities fraud, and five years for an additional conspiracy charge. As the trial nears an end, here are five things we’ve learned so far:

1. Steven Cohen was a target of the FBI’s investigation

The government’s star witness, Dr. Sidney Gilman, testified that when FBI agents first asked him about his relationship with Martoma, they told him they were really after the billionaire founder of SAC Capital Advisors.

“I am only a grain of sand, as is Mr. Martoma,” Gilman said while recounting what FBI agents told him during a meeting in 2011. “They said they are really after a man named Steven A. Cohen.”

Gilman is a former neurology professor at the University of Michigan who in 2008 was helping to oversee clinical trials of an Alzheimer’s drug then under development by Elan and Wyeth Pharmaceuticals.

According to the government, after receiving an inside tip from Gilman about troubles with the drug trial, Martoma reached out to Cohen to it say it was “important” that they speak. In the 20-minute conversation that followed, Martoma allegedly indicated he was no longer “comfortable” with SAC’s investment in the drug makers. Soon after that July 2008 phone call, SAC reversed a $700 million stake in Elan and Wyeth, netting $276 million in profits and avoided losses.

Cohen has so far avoided criminal charges, but he faces a civil lawsuit filed by the Securities and Exchange Commission that accuses him of failing to properly supervise his employees.

2. The government’s star witness may be flawed

Gilman has already testified to one of the government’s main points. As he told the court, “I revealed information that was confidential about a drug trial to Mathew Martoma inappropriately.”

While that admission is potentially damning for Martoma, the defense also won an important admission from Gilman: that he lied to authorities for nearly a year about the information he shared with their client.

Gilman eventually came clean following Martoma’s arrest in November 2012. He signed a nonprosecution agreement in exchange for cooperating with the government.

The defense argues that Gilman’s deal with the government raises questions about his credibility. It has also sought to make an issue of the 81-year-old’s memory. As The New York Times reported:

The doctor showed signs of a patchy memory when he was unable to recall dozens of meetings with other hedge funds he consulted with. He testified that even though he met with analysts and traders working for hedge funds like Citadel, Caxton Associates, Magnetar Capital and Maverick Capital, as well as money managers at JPMorgan Chase and Putnam Investments, the only meetings he recalled with clarity were those with Mr. Martoma.

3. Another source was “flabbergasted” by Martoma’s knowledge

A second doctor testifying in the trial was Joel Ross, a geriatrician and clinical associate professor at the Icahn School of Medicine at Mount Sinai in New York. During his cross-examination, Ross told the court that he regularly provided Martoma with confidential clinical-trial results.

Even still, Ross said he was “flabbergasted” to discover that Martoma knew as much as he did about a closed-door medical presentation he attended in 2008. The presentation was the first time that investigators working on the Elan and Wyeth drug trial were told of the results.

“It was like he was in the room with me, with those slides I had just seen,” Ross testified.

According to the government, Martoma knew as much as he did because Gilman had tipped him off more than one week earlier.

4. The Elan and Wyeth sell-off was kept quiet at SAC

Timothy Jandovitz, who worked for Martoma at SAC, told the court he arrived at work the day after the results of the clinical trial were made public assuming that he and his boss might be out of a job.

“I believed that we had incurred significant losses in our portfolio,” Jandovitz said. “Normally Steve Cohen doesn’t like it when you lose him money.”

What Jandovitz didn’t realize, according to prosecutors, is that SAC has already reversed its position, albeit quietly. According to Jandovitz, Martoma told him that he was instructed by Cohen to not discuss the sell-off.

5. Martoma was expelled from Harvard Law School

Before ever landing a job with SAC, Martoma was kicked out of Harvard Law School for faking his grades.

In December 1998, Martoma created a phony transcript while applying to be a clerk for a federal appeals court. He changed his first-year Civil Procedure grade from B to A; Contracts from B+ to A; and Criminal Law from B to A. He left alone his grades in Torts (B+), Property (A) and Negotiation (A-).

According to findings from a Harvard administrative board, Martoma claimed that he falsified his transcript in order to make his parents think his grades were better than they actually were. He said he asked his younger brother to assemble and then mail his applications, but the brother mistook the fake transcript for the real one.

Martoma was found out when a clerk in one of the courts he applied to checked the transcript with the law school registrar. Martoma was brought before the administrative board, which ruled that he had “falsified his transcript, interviewed with judges under false pretenses, and gave untruthful answers to questions of administrators at the law school.” After his expulsion, Martoma changed his name — it used to be Ajai Mathew Mariamdani Thomas — and won admission to Stanford University’s Graduate School of Business. He graduated with an MBA.

News of the expulsion emerged from two orders issued by U.S. District Judge Paul Gardephe in which he ruled that documents related to the incident should be unsealed.

Martoma’s attorneys fought to keep the documents sealed, calling the information “volcanic” and “grossly prejudicial.” A spokesman for Martoma said that raising the expulsion represented “a transparent effort by the government to unduly influence the ongoing court proceedings.”

Mathew Martoma leaves the federal courthouse with his wife Rosemary in New York, Monday, Nov. 26, 2012. Martoma, accused of enabling a quarter of a billion dollars in profits through inside information appeared in a New York court Monday for the first time and was released on $5 million bail after his 12-minute appearance before a federal magistrate judge. (AP Photo/Seth Wenig)

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